Eating Away at Government Coffers: Oil Smuggling in the Philippines

The World Bank has raised its 2013 growth forecast for the Philippines, stating that prudent economic policies coupled with political stability will aid in its faster expansion.

The Philippine economy is also projected to grow 6.2 for the year ending 2012, up from 5 percent that the World Bank projected in October.

However as is often the case in this Southeast Asian country, there are complications. Poverty here is chronic and imbedded in every part of society so any economic uptick usually doesn’t trickle down to the masses. A casual walk through the streets of Manila attests to this fact.

Another problem that may be even more of a drag on the Philippines’ ambitions to rise itself from third world status is oil smuggling.

Oil smuggling here is so pervasive that the chairman of one of the country’s largest refiners said that as much as one third of oil products sold in the country are smuggled.

Implicated in this quagmire are customs officials on the take, oil executives that often cry the loudest for enforcement and foreign middlemen importing their illegal cargoes. The end result is loss of revenue that Manila desperately needs in its coffers.

Just before Thanksgiving, Shell Philippines Vice President for Communications Roberto Kanapi said that oil smuggled in the Philippines remains unabated, depriving the government of as much as Pesos 30 billion (three quarters of a billion dollars) in potential revenues annually, a staggering figure for the Philippines.

Kanapi told reporters in Manila that the Philippine oil industry continued to be affected by oil smuggling in various areas of the country, including Subic Bay Freeport [a tax and duty free zone] and the Phividec Industrial Estate in Misamis Oriental.

The Philippines charges a 12 percent value added tax (VAT) on all gasoline sold in the country, Kanapi said, adding that with gas averaging around Pesos 50 per liter, foregone revenues for the government amounts to around Pesos 6 per liter.

He said that oil companies were hoping newly installed Energy Secretary Jericho Petilla would address the problem.

Interestingly, in 2010 Shell Philippines denied allegations that it had been involved in smuggling petroleum products and defrauding the government of Pesos 24-billion excise and value added taxes between 2005 and 2009.

The Philippine government has been addressing the problem for the past several years but with poor results. The Department of Finance extended an anti-smuggling pilot program that involved marking imported kerosene and diesel shipments arriving at the ports of Subic, Clark, Batangas, and Bataan.

Recently, the Philippine DOE proposed a Pesos 500 million plan to co-ordinate various governmental agencies including the Bureau of Customs (BOC), the Bureau of Internal Revenue (BIR) and others to enable them to track all imports into the country using an online X-ray imaging system, according to Agora Business Intelligence. However the plan will be implemented at just two pilot sites, Manila Port and the Manila International Container Port.

Oil smuggling can take many forms. The most pervasive is technical smuggling. Suppliers misdeclare their shipments, under-report shipments or use fraudulent, falsified or erroneous declarations to avoid paying appropriate customs fees and charges.

The other is outright smuggling, avoiding governmental agencies all together. Often outright smuggling in the Philippines is committed by small oil tankers or fishing boats that load oil products from a mother ship in international waters, then bring their cargo into a port thereby avoiding authorities.

Trying to track down companies in 2010 that were smuggling steel and oil into the Philippines, I had a lunch meeting in Manila with Jesus Arranza, director of the Federation of Philippine Industries (FPI) and head of the FPI’s anti-smuggling committee. Arranza said that oil smuggling in the Philippines had been around for decades and that the government was “basically powerless to stop it.”

Fuel siphoned off oil tankers moored away from customs zones was a large part of the problem according to Arranza.

As we talked, Arranza’s hand rested on two large manilla folders, which he said contained proof that one of the country’s largest oil companies had been buying smuggled oil. He even mentioned the company by name but would not share his documentation, promising to do so at a later time, which never came.

Since no news ever broke concerning the company he mentioned, I assume he never released his findings or if he did, it was silenced.

Another oil player here however, Phoenix Petroleum, an independent Philippine oil company, was indeed indicted for technical oil smuggling. The drama played out in the Manila media for nearly a year. Though, and not unsurprisingly, Phoenix was cleared in the Pesos 5 billion oil smuggling case, the Manila Standard reported on November 27.

The Department of Justice (DOJ) threw the case out, claiming that the BOC failed to present enough evidence to prove that Phoenix violated the tariff and Customs Code. A complaint had been filed in 2011 by the BOC for non-payment of excise and value-added taxes as well as non-submission of import documents.

Not that the government is without some success it dealing with the problem – but on a small scale. In January 2011, customs seized two cargo ships smuggling bunker oil worth Pesos 60 million at North Harbor, Manila. Officers of the two vessels failed to produce evidence of payment of duties and taxes for the oil shipment, according to local media reports.

And, last March the Philippine Coast Guard seized smuggled oil off the coast of Palawan, but the catch was miniscule, worth just Pesos 900,000, only $22,000.

However, these catches represent just a tiny fraction of oil that is smuggled into the country.

With various oil companies seeking to avoid paying excise fees and the 12-percent VAT and smugglers and middle men alike eager to make handsome profits, along with customs officials which are often compliant or along for a piece of the action – oil smuggling in the Philippines looks poised to continue into foreseeable future, depriving Manila of much needed revenue.